Advice required...to sell or not to sell...

[Neo]

Perhaps in our current situation we need to take one step back to go two steps forward. I will list below our details and I would really appreciate your thoughts or ideas.
.............mort.mv. owned for.returning per wk
Rental 1 $165k $265k 4.5yrs $291
Rental 2 $190k $280k 2yrs $310
Rental 3 $225k $330k 1.5yrs $400

Own home $79k $440k

We are currently building a unit on the rear of rental 3 (which already comprises of 2x2 bdrm units), the rent will be $250 pw for the extra mortgage of $140k.
Our combined earnings are $50k, we have just had our second child and I stay at home with the children. I am not interested in working fulltime as I will miss the best years.

Our weekly income is stretched out as follows:

visa $250 (food and petrol)
Rentals $100 (top up for rates/ins and maintance)
savings $100
mort $250

We walk a fine line, I believe we have done well with our decisions but I am concerned if something major happens we will not be able to afford it. People assume we are well off becasue we have rentals but we are just skimming through. We are hoping to extend our current home in 2-3 yrs to add another bedroom (3rd child) and our goal is to buy a rental a year, but I am not sure whether we will be able to do this.
Do we sell rental 1 which will give us approx 90k (depending on our situation or reason for selling, tax may come off this) we then pay our own mortgage off and put the balance towards future extensions. We then purchase another rental property at 100% finance, it would need to be close to cashflow + (hard to find in Hamilton at the moment). We then have an extra $200 in the hand each week (after rates/ins) or do we struggle on and cross our fingers that nothing goes wrong, and if it does I can generally work something out. Your wisdom would be greatly appreciated.

[drelly]

Hi Neo,

I've done some very ballpark figures from what you provided and although your LVR is only around 30% or so, I thought your cashflow was reasonably good based on a fixed mortgage at 7.3%. In fact, going on my figures, I was wondering why you were topping up the mortgages at all?

Have you sat down and worked out your true cashflow on the properties including running costs with and without depreciation? Unless I'm way off somehow, you shouldn't need to top up the rent and after tax, you'd get a healthy refund?

cheers,
Dave.

[xris]

Hello neo,

I can relate to your situation. Some immediate thoughts are that you should not sell any of them. If you do you will later regret it.

Try to think of other ways to reduce your weekly expenses or increase your weekly income. For example, a small change in interest rates will alter the balance by a marked amount. $ 250 per week on food and petrol? Are you a travelling salesman or do you pig out on pizza takeaways every night?

You should not forget that the more property you own the greater the number of options open to you in terms of rearranging finance, not just in the way the bank regards and treats you. These options could take many forms, many of which you will not have thought of. An hour spent with a good specialist accountant may be money well spent, as might time spent reading some of the ideas on this site.

Somebody said recently in another thread that you will always find the money for whatever purpose you want to put it to. I totally agree with that. So, my advice is not to take the easy option which is to sell a property, but rather to take a fresh look at the situation and come up with another plan which does not involve selling.

xris

[Aston]

I've been through this sort of thing myself, about 10 years ago, and I didn't ask anybody for advice, I just sold.... BIG MISTAKE.

I didn't really need to sell but selling just made my immediate situation a lot easier. In hindsight, all I really needed to do was to be a little more creative in my problem solving skills.

Property is a long term investment and to get the real benefits from it you need to be in there for the long haul.

If you can hold onto your properties now, you'll be much better positioned in the future and have a lot more options long term.

You seem to have a reasonable amount of equity there so even if something does come from left field you can easily borrow to cover it.

I also used to worry about the unexpected but it NEVER actually happened and in most situations it never will happen. The problem with worrying about all these unlikely things happening to you is that you can actually attract all these 'bad luck' things into your life. I think it's a lot more important to remain positive and learn to deal with these things if they do happen to come along. Property will provide you with more options to deal with anything unexpected in your life.


Aston

[ActionMan]

Hi

If you were considering not selling as Xris mentioned its worth relooking at your current mortgages.

Are they on P&I or interest only. Putting your rentals on interest only may increase your cashflow.

Taking your properties to another bank and negotiate a lower interest might help.

Are they managed? If so - then negotiate for lower fees or manage them your self.

Are your property in LAQC or in your names. If LAQC probably worth changing share ownership to 100% for you partner so tax return would be maximised while you're not working. See Accountant.

Arrange that tax refunds is made with fortnightly pay rather than as lump sum at the end of the year. There is a IRD form for this.

Try to negotiate your insurance with another company might help.

Can the rent be increased with a bit of do up? Check if you're getting max rent for the area. Spending $2000 to put rent up by $20 is good return. Offer a washing machine etc...

Well - you may have already done this but I dont think you should sell just because you think financial trouble could hit you. You can always sell if you're really in trouble.

[GO DO IT]

Advice sounds great

The advice that I have read sounds great.

An insurance broker may be able to reduce insurance costs.

If you can hold all of them, then that would be your 'long term' best option.

We were in a similar situation a couple of years ago, we had 5 rentals and decided to sell one to give us some money to buy more. We took $80K cash gain and reinvested it into trading property. The properties we traded that year, as a result of selling that one property, earnt us in excess of $400K profit.

For us it was worth sacrificing one rental. So my thoughts would be, sell a property if you can utilize the profit to make more profit, if there is a chance that the money will end up being spent on things that aren't income producing, then look at options to hold.

I should add that as a result of our trading that year we have now added to our rental portfolio and have in excess of 30 rentals.

Regards

[Neo]

Thank you for your replies.
In answer to some of your suggestions, the repayments for the mortgages are:

rental 1 $955.00 mth (I only),
rental 2 $1367.00 mth (I & P),
rental 3 $1425.00 mth (I only).

Total mort for the year $44,964
Total earnings for the year $46,170 (after fees)

Last years expense figures include:

Rates $3,447
maintance $1,545
Accounting $1158
Lawns $465
approx 3 weeks non tenancy for rental 3 $1200
Total $7815

So after earnings we still need to top up the account by around $6600per year. Last years tax refund was $5000

We have just changed over rental 2 to I & P as we are keen to lower the principal. There is a management fee of 10% payable on Rental 1 & 2, these two properties are leased to a government agency with no non tenancy periods-despite the slighter higher management fee we find this an excellent lower risk option and they pay slightly higher rental rates.Rental 3 is managed by C21.

In response to my outgoings for food and petrol, my husband works 45mins from home and I work 30mins from my home (I work 1 day per week).
I estimate food to be around $140 for a family of 4, gas $80 and the visa also includes gifts, farm items etc. I am an extremely frugal person, I buy secondhand clothes for the kids (good quality for peanuts!), we killed a beast from our block for the freezer, minimal entertainment (maybe dinner and show twice a year or when we can find a baby sitter!) takeaways maybe once per month. I cut the boys and my husbands hair - trust me if I can cut corners I will, that is how we have done so well so far.

I am addicted to property I am in no rush to sell any of them, on the contrary I want to have more but I just get a bit concerned sometimes, we will continue to buy at least 1 a year because it is our passion, we would love to retire at 40 whether it happens or not I don't know but it is a dream and we are pretty focused. That is why I appreciate your feedback, you guys are really knowledgeable and can offer different solutions or ideas.

We have recently down graded our own home so we would have a smaller mortgage (it used to be $125k, now it is $79k). We are with BNZ, we have found them to be excellent in their service and rates.

Some insurances companies won't touch lease properties, we insured Rental 1 & 2 through State Ins and Rental 3 through Landlord Pro-plus (they offer complete replacement for mallicous damage, which is rare for rental properties).

Our leased houses have recently gone up in rent and we are getting top $$ for Rental 3 (I had it apraised by another firm a few weeks ago) we have done the unit upstairs with new paint and nets we do need to do this to the downstairs unit.

Once again, thank you for your feedback 'Drelly, Xris, Aston,Actionman, GO DO IT' it is really appreciated.

Neo

[SuperDad]

Hi Neo,

I've just read your post and the replies, and I'd like to add my thoughts.

On the figures you have fiven us on the loan on your second property ($190K, paying $1367 P+I per month), I have guestimated that you are paying the loan over 25 years at 7.25% interest. (O.K., I didn't guestimate, I used a mortgage calculator and adjusted the firgures until I got your monthly payment for that loan amount.)

If you switch to IO on that loan, the monthly repayment will reduce to around $1150 per month - there's $200 per month cashflow right there. It sounds like you're very careful with your money, so I'm sure that's a good help straight away.

I see that you have recently changed to P+I on property 2. I know that you want to get the principle down, but your post is titled "To sell or not to sell." I'd sooner change to IO for a couple of years to improve your cashflow than sell a property.

If cashflow is still a problem even after freeing up $200 per month, then perhaps the next step is to reconsider your buying strategy. You say you want to continue to buy at least 1 a year. I'd suggest looking for pre-tax cashflow positive properties that make a loss after tax. Even one of these should help your immediate situation. So instead of thinking "To sell or not to sell?", perhaps you should be thinking "What should my next property purchase look like?" You know that you need cashflow wise, and you look like you have a tight handle on your finances, so you should know exactly what income you need from your next purchase in order to balance your portfolio.

Perhaps in our current situation we need to take one step back to go two steps forward.

No, you just need to take two steps forward.

Best of luck,

Paul.

[SuperDad]

Hi again Neo,

Just a quick thought, which might stike you as a bit random.

I see that you're farming. Do you have possums on your property? Possum fur (plucked, not skins) fetches $75-$80 per kilo. It takes around 20 mighty waikato possums to get a kilo of fur - good money. You can do something for the environment and improve your cashflow at the same time!

Paul.

[Monid]

Hmm, in this case I agree with Paul about switching to interest only.

But only because you still have a mortgage on your own home. One easy way to free up cashflow is to be paying this down as quickly as possible. This is better than paying off one of your IP's faster since the interest on the IP's is tax deductable but the interest on your house isn't. $200 a week would make a fairly substantial contribution to a $79000 mortgage.

Other than that you are close enough to the wire that I wouldn't buy another property unless it was geniunely cashflow positive after all expenses... Which as has been noted is pretty hard these days...

David

[Neo]

Thank you for your feedback

I will talk to my bank manager on Monday to see if I can change Rental 2 loan to I only, we have only just refixed it for 5 yrs at 7.6% so hopefully we can do it.
Once we have finished building the unit on Rental 3 we will look out for cash flow + properties as we can't really afford to top them up anymore.

Neo

[JohnL]

If agree with Davids point about paying down your own mortgage first and go I only on all the rentals.

With your passion for property, I would definitely look at property trading as Derrick and Robyn did. This can generate cash which in turn you can use to pay down your rentals, or buy more. As you are always buying and selling, you can keep the really great deals for your self.

There are set up costs as you need to have the correct structures in place to prevent the 'tainting' of future rentals.

There are a number of options including the lower risk 'property finding' business all the way through to full do-ups and even minor developments.

John

[Neo]

Thanks for your message John,

I would like to enter the trading market but I am scared of tainting my future rentals. Our income is low so our only way to bring cash in is to sell something at some point. I will look into this and read other posts to try and understand the trading game and the structures involved. As you have probably gathered I am a buy and hold person, I need to get out of my square.

Thanks again

Neo

[SuperDad]

Hi again Neo,

There is a lot of good information on this forum about how to avoid tainting one's portfolio when one is trading. Do a search on "trading trust", and you'll have plenty of reading.

My wife and I have just used Company Solutions to set up a buy-and-hold trust, and we will shortly be setting up a trading trust. It is the latter trust that, when properly structured, keeps one on the right side of the IRD.

Paul.

[NZGEMS]

Hi Neo
Well you have reveived some great information already, i would definitely change to IO loans, if you are keeping for ever you are going to experiance capital gain in the long run.

You could use investors for trading you know, use other peoples money till you have enough for your own deposits? AND you could pay off your own mortgage which wont be tax decudtable.

I used to think I had to keep everything, I bought my first property in 1990, second 1993 then in 1996 some flats(BAD INVESTMENT) then after attending dolf de roos in 1999 I went out and bought 2 properties for 70% of value, had never heard of buying wholesale before. At this point the bank had said in no uncertain terms NO MORE, so of course being the good kiwi i am I belived them, but i was itching to do more as we had a goal then to buy 10 properties and by the time i got to 50 years old we were going to sell off what we needed to of them to pay down the remaining loans and retire living frugally (yes i used to buy second hand too, still do in some things, those habits arent all bad I beleive) BUT
the very next year John Burley came to town and I went along and from that I realized I didnt have to keep everything I purchased, I could do quick cash as John Called it, buy and sell houses and put cash in my pocket. I could also do lease options or rent to buys or wraps to give some cashflow if i was holding some of the trades for a while with alot of equity and not quite enought cashflow to cover the outgoings. AND most importantly I didnt have to listen any more to any of those people who told me I CANT DO IT. And there are plenty of them of course, husband too at that stage.
So off I went and just started buying, i have continued my education on properties and self beleifs too and of course the rest is history, I have just done my 235th property deal, and I am counting still.
Long ago gave away the idea of having 10 and retiring at 50, who wants to retire anyway, life is so much fun and so is this property game, yes it is a game when you get into it like we have (husband on board now too of course, infact so it the 18 years old son)

You really can make alot of fun of this, and you are lucky you obviously live near me, I am happy to talk to you both over coffee or lunch (your shout) after I have got back in the country I will be unavailabe till mid July now as on Tuesday I am going to be away for pretty much 3 weeks. back for a couple of days inbetween trips but wont be seeing anyone except my family then.

You really can make a great go of this, family time only gets better, you can still buy secondhand, i just bought myself a lovely BMW last week for $14000 only done 89000 k's and had all I wanted. Looks like a $100,000 one of course so people are impressed, I just love laughing to myself as it will have cost less than their cars, of course if they bring it up I expain to them.

You can have absolutely anything you want with this life, I am about to put out an update to the journey to Financail freedom and beyond, on the past year. I am just trying to get it across to everyone we can all have what we desire if we can locate what is holding us back and eliminate it so we can move forward.
Life if alot of fun, enjoy your kids but enjoy life with them in Luxuary not poverty just because you can. the other thing that is great when you really get into this is you can help so many other people too you see in so many ways.

Anyway better stop am raving on a bit, maybe it might be best as godoit suggested to sell one house if it means you can make alot more from doing that but there are also other options, there are always people willing to take a good return say 20% on their money for loaning it to you for a while of investors who will buy a house and split the profit with you on sale if you are prepared to do the work, plenty of ways to get money, I used these two methods when I started out because like many others I had no money either, just a huge desire to get out of the box i was currently in.

Best of luck, hope to hear from you some day.
Robyn